Thursday, July 25, 2013

Power Sector Reforms: Lessons from Vietnam





The Vision 2020 economic plan was launched in 2009 to drive Nigeria towards becoming one of the top 20 economies in the world by the year 2020. This plan had several goals including the generation, transmission and distribution of 35,000MW of electricity by the year 2020. In 2009, Nigeria’s average daily electricity generation was 3,700MW, which was hugely insufficient for the 157m people living in Nigeria at the time. Ideally, power generation capacity should correlate with the population of a country. For instance in 2009, South Africa generated 40,000MW for a population of 50m, Brazil generated 100,000MW for 192m people and the United States generated 700,000MW for 308m people. In this light, the Nigerian power sector clearly needed reforms.

Four years have passed since the Vision 2020 plan was birthed and there is already a massive gap between the planned and actual. The plan was to achieve 16,000MW by 2013; however, Nigeria is still struggling to maintain a generation of 4000MW mid-way through 2013. The dependence on thermal generation and inability of management to ensure a steady supply of gas has kept the country behind some of its peers. The slow progress in increasing power generation in Nigeria is not new.
Preceding Vision 2020 was the Electric Power Sector Reform Act of 2005 (EPSR) which was the foundation for power sector improvements. However, no major improvements have been made as Nigeria’s installed generation capacity has grown from only 6000MW to just over 8000MW in the last decade. This is very disconcerting considering that the contents of Nigeria’s reforms are similar to those in some other countries which have seen better results. So why has there not been a surge in Nigeria’s power generation?

Case Study of Vietnam
Vietnam is a Southeast Asian country with a deep history of conflicts and war. Originally colonized by China, Vietnam won its independence before France colonized it once again. The Japanese invaded Vietnam during World War II and this led to the First Indochina war in Vietnam between 1945 and 1954. By 1954, Vietnam fought off the French to gain its independence at the cost of its unity. Northern and Southern Vietnam began a war in 1954 that would last for 21 years (compared to two and a half years of the Nigerian Civil War) leaving millions dead and the economy ravaged. Unified under the Communist government in 1976, Vietnam began a series of economic and political reforms that would set the foundation for future growth.

By 2012, Vietnam had a GDP of $123.6bn and a population of about 90m, representing approximately half of both Nigeria’s GDP and population. According to the Economist Intelligence Unit’s (EIU) key economies to watch in the next five years, Vietnam ranks fifth (Nigeria ranks 2nd on this list). Vietnam is also a member of the Next 11 Economies as in Nigeria. The Next 11 economies are countries with high potential to become the world’s largest economies in the 21st century along with the BRICS. Vietnam recognized the need for power improvements to support its growth over the years. As a result, the country embarked on power reforms which started in 2005 when a new electricity law came into effect.

Through the establishment of the new electricity laws, Vietnam aimed to:

·      Expand and improve the power system (resource development)
·      Enhance the transmission lines
·      Reduce transmission and distribution losses

The Vietnamese government created competition in the power sector, which drove the expansion and improvement through:

·      Investment by the state-owned Vietnamese Electricity
·      Generation and distribution companies became different units under a holding company (similar to the Power Holding Company of Nigeria)
·      Build-Operate-Transfer (BOT) by granting concessions for construction and development Independent Power Projects (IPP) through the participation of private capital

Vietnam’s installed generation capacity was able to grow from 11,578MW in 2005 to 24,500MW in 2012, with a reduction in transmission and distribution losses by an annual average of 0.6% within the same period. The growth in installed capacity was greatly supported by IPP development. The addition of approximately 13,000MW between 2005 and 2012 may be viewed as meager but that of Brazil, another emerging economy and the world’s 10th-largest electricity producer, increased by the same amount within the same period. In contrast, the generation capacity in Nigeria, a country that can be grouped with those above, has remained flat throughout this same period.

As stated earlier, the Vietnam government recognized the need for power reforms to support its growth. Corruption is one of the major issues in Vietnam, just like in Nigeria. In 2006, a new anti-corruption law came into effect in Vietnam and this helped to reduce corruption in Vietnam over the years even though corruption is still a major problem. The reforms in the power sector led to improved management in the sector and when coupled with reduced corruption, this led to increased efficiency and growth of the sector.

Lessons for Nigeria
There is a lesson for Nigeria to learn from Vietnam’s power sector progress. Just like Vietnam, Nigeria’s on-going power sector reforms involve changing the structure of the sector to separate generation, distribution and transmission units. However, Vietnam was able to effectively create competition in the sector while Nigeria has not succeeded in achieving this so far. The defining factors that have differentiated the two countries over the past years are reduced corruption in the sector and improved management.

The government of Vietnam was able to display better management of the power sector, which attracted the much needed investments. Even though Vietnam is still viewed as one of the most corrupt nations in the world (ranking 123rd while Nigeria is ranked as more corrupt in the 139th position according to the Transparency International Corruption Index), the government was able to cut down on this corruption in the power sector to allow progress to be made.

Corruption and poor management have been highlighted as some of the causes of the poor state of power in Nigeria. Addressing these issues will hasten reforms and attract the needed investments which would create competition, diversify the generation mix and aid in the development of the human capital needed to support the reforms.

The above article is an excerpt from the July 2013 Bi-monthly Economic & Business Update published by the Financial Derivatives Company.

Email: fdc@hyperia.com; Website: www.fdcng.com

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